In re Remec

The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. Magistrate Judge United States District Court

This Document Relates to: All Actions.

Order Granting In Part And Denying In Part Defendants' Motion for Protective Orders [Doc. Nos. 114, 118 and 119]

Defendants', REMEC, Inc., Ronald E. Ragland and Winston E. Hickman have filed motions for protective orders seeking to limit the scope of third party subpoenas served on REMEC's financial advisor, Needham & Company LLC; Powerwave Technologies, Inc., the purchaser of REMEC's Commercial Wireless Division in 2005; and Chelton Microwave Corporation, the purchaser of REMEC's Defense & Space Division in 2005. Plaintiffs' have opposed the motions and Defendants have filed replies. Based upon the reasons set forth below, Defendants' motions for protective orders are hereby GRANTED IN PART and DENIED IN PART.

Background

In this case, the Plaintiffs' allege in their Fourth Amended Complaint a violation of section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and a violation of section 20(a) of the Exchange Act. Plaintiffs' claim that between September 8, 2003 and September 8, 2004 (the "Class Period"), REMEC: 1) failed to timely write down goodwill; 2) delayed or failed to write down its excess and obsolete inventory; 3) failed to properly account for the sale of "Zero-Value Inventory"; and 4) used flawed assumptions in performing its goodwill impairment and inventory analyses, allegedly due in part to a lack of adequate internal controls.

Discussion

Pursuant to the claims set forth in the Forth Amended Complaint, Plaintiffs' served subpoenas on third parties Needham, Powerwave and Chelton. Defendants move this Court for a protective order with regard to these third party subpoenas on the grounds that the subpoenas are over broad and irrelevant to the claims and defenses alleged in this case. Plaintiffs oppose the motions on the grounds that Defendants: 1) lack standing to object to subpoenas served on these third parties; and 2) have failed demonstrate good cause for the protective orders.

I. Standing

The Plaintiffs oppose Defendants' motion on the grounds that Defendants lack standing under Rule 26 to seek a protective order because the subpoenas do not seek discovery from the Defendants and the Defendants have failed to make a claim of privilege or alleged a specific prejudice or harm. Alternatively, Defendants contend that a protective order pursuant to Rule 26(c) is warranted because the discovery sought by Plaintiff is not relevant to the claims or defenses in this case. Defendants also contend that such broad discovery will confuse the issues in this case and result in further motion practice when the Plaintiffs attempt to use such information in their case.

As a general proposition, a party lacks standing under Federal Rules of Civil Procedure Rule 45(c)(3) to challenge a subpoena issued to a non-party unless the party claims a personal right or privilege with respect to the documents requested in the subpoena. Nova Products, Inc. v. Kisma Video, , 220 F.R.D. 238, 241 (S.D.N.Y.2004); In re Cree Inc. Securities Litigation, 220 F.R.D. 443 (M.D.N.C.2004). A party can move for a protective order in regard to a subpoena issued to a non-party if it believes its own interests are jeopardized by discovery sought from a third party and has standing under Rule 26(c) to seek a protective order regarding subpoenas issued to non-parties which seek irrelevant information.*fn1 Several Courts within the Ninth Circuit, including the Southern District of California, have recognized this sound principle of law.*fn2 As such, this Court finds that Defendants have standing to seek a protective order under Rule 26(c) pursuant to the third party subpoenas issued to Needham, Powerwave and Chelton.

II. Relevance of the Requested Discovery

Pursuant to Rule 26 of the Federal Rules of Civil Procedure, parties may obtain discovery regarding any matter that is not privileged, which is relevant to the claim or defense of any party. Parties have no entitlement to discovery to develop new claims or defenses that are not identified in the pleadings. Fed. R. Civ. P. 26(b)(1). As such, the more narrow claim or defense standard applies unless good cause is shown by the party seeking the discovery to broaden the scope of discovery to the former subject matter standard.

Plaintiffs' claim that between September 8, 2003 and September 8, 2004 (the "Class Period"), REMEC: 1) failed to timely write down a goodwill; 2) delayed or failed to write down its excess and obsolete inventory; 3) failed to properly account for the sale of "Zero-Value Inventory"; and 4) used flawed assumptions in performing its goodwill impairment and inventory analyses, allegedly due in part to a lack of adequate internal controls.

Plaintiffs' contend that third parties Needham, Powerwave and Chelton possess important evidence regarding Defendants' fraud in concealing from investors the true business and financial condition of REMEC, including its impaired goodwill during the class period. Plaintiffs contend that REMEC purchased several companies before and during the class period, booking goodwill in connection with those transactions that comprised a significant portion of REMEC's publicly disclosed goodwill during the class period. At the end of the class period, REMEC disclosed a $62.4 million goodwill impairment charge, writing off approximately 96% of the Company's total recorded goodwill. Plaintiffs' argue that the information they seek is relevant valuation related documents regarding REMEC's true financial condition, value and possible asset impairment. Plaintiffs' contend ...

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